Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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The following discussion and analysis of the results of operations and financial condition for the three months ended March 31, 2014 and 2013 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements.”
We are a non-state-owned real estate development company focused on residential and commercial real estate development in “tier-three” cities in the PRC. Our projects are currently concentrated in Xingtai City, Hebei Province.
We have completed our Ming Shi Hua Ting, Wancheng New World and Kirin County projects in Xingtai City. Our current projects include Kirin Plaza, Kirin Bay and No.79 Courtyard, which collectively call for the development of more than 7,000 homes over the next five years in Xingtai City. We intend to expand into the Bohai Sea Surrounding Area, comprised of Beijing, Tianjin, HebeiProvince, Liaoning Province and Shandong Province, and begin additional projects in the next three to five years.
We focus on middle-income customers in tier-three cities and strive to offer affordable homes. We believe that we are able to keep up with growth relying on: (i) our experience in developing real estate projects; (ii) our experienced management team; (iii) our expertise in conducting real estate sales; (iv) our reputation in the local markets we serve; and (v) our strong working relationship with local government.
Recent Developments
At March 31, 2014, we have the following projects under development:
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POC
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Construction beginning
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Estimated Completion
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Kirin County
(including Kirin Plaza)
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98.3%
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September 2011
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Late 2014
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No.79 Courtyard (Phase I)
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95.3%
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September 2011
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Late 2014
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No.79 Courtyard (Phase II)
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59.1%
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September 2012
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Mid-to-late 2015
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No.79 Courtyard (Phase III)
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53.6%
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April 2013
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Mid-to-late 2015
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Kirin Bay (Phase I)
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85.1%
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October 2011
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Late 2014
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Kirin Bay (Phase II)
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63.1%
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March 2013
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Early 2015
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Kirin Bay( Phase III)
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38.3%
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May 2013
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Mid-to-late 2015
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Furthermore, at March 31, 2014, we started the constructions of No. 79 Courtyard (Phase IV) and Kirin Bay (Phase IV);
Financial Performance Highlights
The following summarizes certain key financial information for the three months ended March 31, 2014.
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Total revenue was $7.4 million for the three months ended March 31, 2014, a decrease of $6.6 million, or 47.2%, from $14.0 million for the same period of 2013. Our revenue stream has shifted from the Kirin County project, which was completed in 2012, to No. 79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III), which are expected to generate the majority of our revenue in the upcoming 12 to 18 months;
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Gross profit was $1.6 million for the three months ended March 31, 2014, same as compared to gross profit of $1.6 million for the same period of last year. Gross margin ratio was 22.2% for the three months ended March 31, 2014, an increase of 10% as compared to the gross margin ratio of 11.2% for the same period of 2013. The increase of gross margin ratio was contributed by construction progress and sales of Kirin Bay (Phase I, Phase II and Phase III) for the three months ended March 31, 2014. Kirin Bay has higher average gross margin ratio than the projects in the first quarter of 2013.
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Net loss was $2.1 million for the three months ended March 31, 2014, a decrease of $1.4 million, or approximately 38.3%, from net loss of $3.5 million for the same period of last year, a result of the increased gross profit contributed by the sales of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III) netting off increased selling, general and administrative and interest.
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Factors Affecting our Operating Results
Growth of China’s Economy
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We operate and derive all of our revenue from sales in China. Economic conditions in China, therefore, affect our operations, including the demand for our properties and the availability and prices of our raw materials among other expenses. China has experienced significant economic growth with recorded Gross Domestic Product growth rates at 9.2% in 2011, 7.8% in 2012 and 7.7% in 2013. China is expected to experience continued growth in all areas of investment and consumption. However, if the Chinese economy were to become significantly affected by a negative stimulus, China’s growth rate would likely to fall and our revenue could correspondingly decline.
Government Regulations.
Our business and results of operations are subject to PRC government policies and regulations regarding the following:
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Land Use Right
— According to the Land Administration Law of the PRC and Interim Regulations of the People’s Republic of China Concerning the Assignment and Transfer of the Right to the Use of the State-owned Land in the Urban Areas, individuals and companies are permitted to acquire rights to use urban land or land use rights for specific purposes, including residential, industrial and commercial purposes. We acquire land use rights from local governments and/or other entities for development of residential and commercial real estate projects.
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Land Development
— According to the Urban Real Estate Development and Operation Administration Regulation, the Urban Real Estate Development and Operation Administration Rules of Hebei Province promulgated by the government of the Hebei Province, and the Real Estate Development Enterprise Qualification Administration Regulation, a real estate development enterprise shall obtain a Real Estate Development Enterprise Qualification Certificate. We obtained the related certificates and seek to ensure that each phase of our projects complies with our certificates.
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Project Financing
— According to the Land Administration Law and the Property Law of the PRC, the land use rights, residential housing and other buildings still in process of construction may be pledged and mortgaged. From time to time, we pledge and mortgage our land use rights and real properties to lenders in order to obtain project financing.
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Property Sales and Transfers
— For each project we develop, pursuant to the Commodity Houses Sale Administration Regulation, effective of June 1, 2001, we are required to obtain permits before commencing project sales or presales of such project. Local governments act on the region’s interests by helping private companies streamline such projects and often coordinate with regional housing developers to allow for preliminary presales while Pre-Sales Permits are being processed. The local government in Xingtai has recognized the financial cost the Company assumed in administering the resident removal process and offered us permission to collect non-refundable deposits. This is a local practice enacted by the Xingtai local government to encourage project development. By collecting deposits from this type of buyer, we can offer a contractually fixed price to our consumers and ensure them a preference in housing selection. We may not obtain such approval in other cities if we expand beyond Xingtai.
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Government Controls on Real Estate Industry
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The State Council on March 1, 2013 issued five policies and measures to regulate and control the country's soaring real estate market, of which the most significant and also the most controversial point is that 20-percent individual income tax would be levied on capital gains by home sellers whose families own more than one apartment.
The five policies and measures are designed to: 1) Improve and maintain the stability of house prices. Municipalities under the auspices of central government, cities specifically designated in the State plan, and provincial capital cities excluding Lhasa must follow the principle of maintaining basic price stability. They must also compile and publish annual new commercial house price control targets and establish an effective system of accountability for assessing price stability; 2) Curb speculative investments seen in the housing market and implement strict commercial housing purchase limitation measures. For those municipalities under the auspices of the central government, cities specifically designated in the State plan and provincial capital cities that have already implemented housing purchase limitation measures, they must improve limitation measures in the fields of housing areas, housing types, and purchase qualification examinations according to the unified criteria. As for those cities where house prices continue to rise too rapidly, provincial-level governments should request that local-level officials implement purchase limitation measures, as well as enforce differential housing credit policies and expand the range of experimental areas for individual housing property tax reform. An individual income tax of 20 percent would be levied on capital gains made by those home sellers whose families own more than one apartment. 3) Increase the supply of ordinary commercial housing and land and accelerate the supply of land, construction and listing of small- and medium-sized ordinary commercial housing projects, rapidly ensuring an effective supply. In 2013, the total supply of land for housing is lower than the average supply over the past five years in principle. 4) Accelerate the planning and construction of affordable housing projects and ensure the projects to build 4.7 million sets of affordable housing and begin the construction of 6.3 million sets. Supporting facilities should be planned, constructed, and delivered for use within the same time frame as the affordable housing projects. The entry and exit system should also be improved in order to ensure equal distribution. By the end of 2013, prefecture-level cities and above must include into local housing guarantee coverage those migrant workers who meet the requirements. 5) Strengthen market supervision. Strengthen the management of commercial housing sales in advance, strictly implement a clear house price system, tighten enterprise credit management, and severely punish any illegal behavior among intermediaries. The urban individual housing information system should also be promoted and, in addition, market monitoring and publishing management should be strengthened.
The State Council also emphasized the importance of accelerating the implementation of an enduring and effective mechanism to guide the healthy development of the real estate market.
Interest Rate and Inflation Challenges.
We are subject to market risks due to fluctuations in interest rates and refinancing of mid-term debt. Higher interest rates may also affect our revenues, gross profits and our ability to raise and service debt and to finance our developments.
According to the National Bureau of Statistics of China, China’s national inflation rate was 5.4% in 2011, 2.6% in 2012 and 2.6% in 2013. Inflation could result in increases in the price of raw materials and labor costs. We do not believe that inflation or deflation has affected our business materially.
Acquisitions of Land Use Rights and Associated Costs
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We acquire land for development through the governmental auction process and by obtaining land use rights from third parties through negotiation, acquisition of entities, co-development or other joint venture arrangements.
Our ability to secure sufficient financing for land use rights acquisitions and property development depends on internal cash flows in addition to lenders’ perceptions of our credit reliability, market conditions in the capital markets, investors’ perception of our securities, the PRC economy and the PRC government regulations that affect the availability and cost of financing real estate companies or property purchasers.
Significant Accounting Policies
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include percentage-of-completion of properties under construction and related revenue and costs recognized, allowance for doubtful accounts, recoverability of deferred tax assets, and the assessment of impairment of long-lived assets. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.
Fair Value of Financial Instruments
The Company applies the provisions of ASC Subtopic 820-10,
Fair Value Measurements,
for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements. ASC Subtopic 820-10 also establishes a framework for measuring fair value and expands disclosures about fair value measurements.
ASC Subtopic 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
ASC Subtopic 820-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC Subtopic 820-10 establishes three levels of inputs that may be used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
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Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
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Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
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Level 3 inputs are unobservable inputs for the asset or liability.
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The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
As of March 31, 2014 and December 31, 2013, none of the Company’s financial assets or liabilities was measured at fair value on a recurring basis. The Company did not have any nonfinancial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013.
Reporting Currency and Foreign Currency Translation
The functional currency of the Company, Kirin China, Kirin Development and Kirin Management is the United States dollar (“US$”). The functional currency of the Company’s VIEs and subsidiaries of VIEs in the PRC is Renminbi (“RMB”). The Company’s reporting currency is US$. The assets and liabilities of the Company’s VIEs and subsidiaries of VIEs in China are translated at the exchange rate on the balance sheet dates, stockholders’ equity is translated at the historical rates and the revenues and expenses are translated at the weighted average exchange rates for the periods. The resulting translation adjustments are reported under accumulated other comprehensive income in the consolidated statements of income and comprehensive income in accordance with ASC 220,
Comprehensive Income.
Since July 2005, the RMB is no longer pegged to the US$. Although the People’s Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the US$ in the medium-to-long term. Moreover, it is possible that in the future, PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. PRC exchange control regulations may also restrict the Company’s ability to convert RMB into foreign currencies.
Revenue Recognition
Real estate sales are reported in accordance with the provisions of ASC 360-20,
Property, Plant and Equipment, Real Estate Sales
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Revenue from the sales of completed properties and properties where the construction period is twelve months or less is recognized by the full accrual method when (a) sale is consummated; (b) the buyer’s initial and continuing involvements are adequate to demonstrate a commitment to pay for the property; (c) the receivable is not subject to future subordination; (d) the company has transferred to the buyer the usual risks and rewards of ownership in a transaction that is in substance a sale and does not have a substantial continuing involvement with the property. A sale is not considered consummated until (a) the parties are bound by the terms of a contract or agreement, (b) all consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed. Fair value of buyer’s payments to be received in future periods pursuant to sales contract is classified under accounts receivable. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.
The Company adopts the percentage-of-completion method of accounting for revenue recognition for all building construction projects in progress in which the construction period was expected to be more than twelve months at that date.
Revenue and profit from the sale of development properties where the construction period is more than twelve months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met: (a) construction is beyond a preliminary stage; (b) the buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit; (c) sufficient units have already been sold to assure that the entire property will not revert to rental property; (d) sales prices are collectible and (e) aggregate sales proceeds and costs can be reasonably estimated. If any of these criteria are not met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.
Under the percentage of completion method, revenues from units sold and related costs are recognized over the course of the construction period, based on the completion progress of a project. In relation to any project, revenue is determined by calculating the ratio of completion and applying that ratio to the contracted sales amounts. The Company uses a cost-to-cost method to measure the ratio of completion. Qualified construction quality supervision firms are engaged by the Company, as required by relevant laws and regulations in the PRC, to determine that pieces of construction completed by contractors have met predetermined quality and safety standards, and are eligible to be counted towards costs. Cost of sales is recognized by multiplying the ratio by the total budgeted costs. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified under revenue in excess of billings. Amounts received from customers in excess of revenue recognized to date are classified under customer deposits. Any losses incurred or identified on real estate transaction are recognized in the period in which the transaction occurs.
Except for the down payment, remaining contract price can be settled by several installments or financed by mortgage. The Company requires customers to pay non-refundable cash down payment equivalent to no less than 20% of the contract price upon the execution of sale or pre-sale contracts prior to recognizing revenue under either full-accrual method or percentage-of-completion method. The cash down payment collected from customers subordinates to no claims. If buyer’s purchase is financed by mortgage the Company does not recognize revenue until the application for the mortgage loan has been filed and the Company reasonably believes the mortgage can be approved. The Company provides guarantees for mortgage loans from financial institutions to customers (see “Restricted cash”). Such guarantees expire when customers have obtained House Ownership Certificate of their purchased properties and the mortgage has been registered in favor of the financial institutions. Because guarantees of mortgage do not cover any portion of non-refundable cash down payment received by the Company from customers, the Company does not consider guarantees when determining recognizing revenues under either full-accrual method or percentage-of-completion method.
A project’s revenue and cost estimates are of inherent nature of uncertainty throughout its multiple-year development period. Factors that potentially affect a project’s total revenue and cost estimates (including a salable unit’s allocated cost), include, but are not limited to: (1) changes in government’s land-use planning, building density, plot ratio and other quotas; which lead to changes of total gross floor area available for sale and per-unit cost estimate; (2) the Company’s voluntary modification of design to enhance attractiveness and competiveness of an on-going project; (3) fluctuation of commodity prices and government-regulated labor cost rates; (4) contractors’ request to renegotiate consideration of fixed-price agreements, for which the Company’s preference of complete the discussion early to avoid unfavorable impact on construction progress; (5) unforeseeable geological and engineering difficulties causing modifications of a project’s construction plan; (6) government agencies’ compliance inspections in the late stage of the construction, which may lead to modification of design; (7) major prospective property buyers’ request to alter specifications of the property to be delivered; and (8) contractors’ claims throughout the construction period.
The Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers. Under certain circumstances, for example, changes in floor size or floor plan of a property due to legal compliance requirements, or change of deliverable standards upon request of major customers, we may agree to revise the pre-sale contract price to match conditions of the properties to be delivered to customers. Furthermore, the Company is subject to a penalty payable to homebuyers in the event the property is delivered later than the date specified in the pre-sale contracts, and usually such penalty constitutes only an insignificant amount compared to the contract value. These adjustments to contract price are recorded as reduction of revenue in the current period on a cumulative catch-up basis.
With regard to a project’s cost estimate, the Company’s in-house cost estimating staffs, work in collaboration with a committee also comprising the Company’s engineers, project managers, financial professionals, and senior management staff, prepare at least two versions of cost estimate. The first version is Preliminary Cost Estimate, prepared in schematic design stage, which is before commencement of excavation and recognition of revenue. Preliminary Cost Estimate utilizes top-down approach. It projects major cost components at higher level using a project’s planned parameters (e.g., building density, by-category gross floor area) and standard per-unit cost from past experience (e.g., concrete cost, measured at US$ per square meter). Preliminary Cost Estimate is intrinsically less accurate; it heavily relies on the Company’s historical information accumulated in the development of similar types of construction in similar municipal region. The second version is Detailed Cost Estimate, prepared after receiving construction documents from the architect. Ideally Detailed Cost Estimate can be available before commencement of excavation and recognition of revenue; however, in order to suit the pre-sale progress and to maximize flexibility, construction documents are provided in several batches as the construction processes. It is likely that a project’s Detailed Cost Estimate is finalized only in late stage of the construction. Detailed Cost Estimate utilizes bottom-up approach. Based on construction documents and assisted by the Company’s computerized Building Information Modeling system, Detailed Cost Estimate is able to sum up cost at element level of a real estate property, taking into consideration of quantitate consumption and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements, a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval. Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined.In addition to our existing monthly detailed cost estimate upon receiving construction data from the architects, we have hired additional competent professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes to the estimates.
Real Estate Capitalization and Cost Allocation
Real estate property completed and Real estate properties and land lots under development consist of residential and commercial units under construction and units completed. Properties under development or completed are stated at cost or estimated net realizable value, whichever is lower. Costs include costs of land use rights, direct development costs, interest on indebtedness, construction overhead and indirect project costs. The Company acquires land use rights with lease terms ranging from 40 to 70 years through government-organized auctions, private sale transactions or capital contributions from shareholders. Land use rights are divided and transferred to customers after the Company delivers properties. The Company capitalizes payments for obtaining the land use rights, and allocates to specific units within a project based on units’ gross floor area. Costs of land use rights for the purpose of property development are not amortized. Other costs are allocated to units within a project based on the ratio of the sales value of units to the estimated total sales value.
Government Grant
Government grant related to real estate projects developed by the Company are recognized as other income when the Company has complied with the conditions attached to the grant and the grant’s collection is reasonably assured.
In 2008, XingtaiZhongding was entitled to a government grant of RMB 160,000,000 (approximately $22,981,000, translated at historical exchange rate) related to Kirin County project to subsidize the modernization of the neighborhood where the real estate project situated, and control of property price volatility. The Company believes the government’s demands associated with the grant are gradually fulfilled as the construction and pre-sale of Kirin County make progress, and accordingly recognizes grant income at the percentage of construction completed during the year of the total grant amount. For the three months ended March 31, 2014 and 2013, the Company did not recognize any grant income, respectively. All government grants related to Kirin County have been recognized as of December 31, 2012 as the construction of Kirin County completed during the year. The local government has arranged a lump sum payment of the grant to XingtaiJiye Business Investment Co., Ltd. (“Business Investment”), a related party of the Company, prior to the grant’s conditions being met out of financial consideration because it lacked managing staff and concerned that the funds would be re-assigned or invalidated without an immediate recipient. Pursuant to the arrangement, Business Investment provides this grant money to XingtaiZhongding in proportion to the percentage of the project completed as a measure to ensure that the project satisfies the grant’s guidelines. The grant does not have refund conditions and the Company believes government will not revoke the grant or claw back cash remitted to the escrow account unless the construction and sale of Kirin County project is cancelled by the Company. As at March 31, 2014, the Company didn’t receive any request from government demanding revocation and/or partial refund of the grant previously given, and the Company expects no development relating to the Kirin County project will cause government to request the grant’s refund in next twelve months.
Capitalization of Interest
In accordance with ASC 360,
Property, Plant and Equipment
, interest incurred during construction is capitalized to properties under development. For the three months ended March 31, 2014 and 2013, $154,303 and $636,780 were capitalized as properties under development, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Company maintains majority of its bank accounts in the PRC. Cash includes cash on hand and demand deposits in accounts maintained with state-owned and commercial financial institutions within the PRC. China does not have a deposit insurance system; however, the credit risk on bank balances are limited because the Company conducts transactions and deposits balances with several state-owned banks with high credit ratings assigned by international credit rating agencies.
Restricted Cash
There are two important timings for mortgage business of PRC banks: (1) Execution of mortgage agreement: PRC banks grant mortgage loans to home purchasers and will credit the full amount to the Company account once the bank and the purchaser enter into mortgage agreement, which generally will be before the completion of the construction of projects. (2) Issuance of House Ownership Certificate to the purchasers. At the time of execution of mortgage agreement, there are no House Ownership Certificate therefore the purchaser has no legal right to the house and therefore they cannot mortgage the house to banks. Banks will ask the developer to provide guarantee to the loan instead. When the House Ownership Certificate is issued, banks will release the guarantee ability of the developer and mortgage the house in question. If the condominiums are not completed and the new homebuyers have no House Ownership Certificate, to secure the loan, as a common practice in China, the banks will release only 95% loan to the Company and will require that the Company open a separate account with the bank and deposit and freeze the remaining 5% of the mortgage amount to further secure the bank’s interests before the mortgage of the house with House Ownership Certificate. Because bank requires the freeze of the 5% deposit, the amount therein shall be classified on the balance sheet as restricted cash. Interest earned on the restricted cash is credited to the Company’s normal bank account. The bank will release the restricted cash after homebuyers have obtained the House Ownership Certificate and mortgage the house to bank. Total restricted cash amounted to $8,084,904 and $8,362,905 as at March 31, 2014 and December 31, 2013, respectively. These deposits are not covered by insurance. The Company has not experienced any losses in such accounts and management believes it is not exposed to any risks on its cash in bank accounts.
Investments
Investments in securities of private companies the Company does not have a controlling interest and is unable to exercise significant influence are accounted for using cost method of accounting. The Company evaluates at each period end whether an event or change in circumstances has occurred in that period that may have a significant adverse effect on the fair value of the investments. If a decline in fair value is determined to be other than temporary, an impairment loss is recognized to reduce an investment’s cost to its fair value. The Company received $506,548 and $114,544 as dividend for the three months ended March 31, 2014 and 2013, respectively.
Property and Equipment, Net
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
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Estimated Useful Lives
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Fixtures, furniture and office equipment
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5 years
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US Properties
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39 years
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Income Taxes
The Company follows ASC 740,
Income Taxes
, which require the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Subsidiaries, VIEs and subsidiaries of VIEs of the Company located in China are governed by the Income Tax Law of the People’s Republic of China concerning the private-run enterprises, which are generally subject to tax at a new statutory rate of 25% on income reported in the statutory financial statements after appropriate tax adjustments.
According to the Income Tax Laws of the PRC for real estate developers, income tax of the Company is calculated by project. When all units of a project are sold, tax authorities will assess the tax due on the project and issue a tax due notification to the Company. The Company has to pay the tax by the due date on the notification. If the Company does not pay the tax by the due date, the tax authorities will charge the Company interest. The Company includes any interest and penalties in general and administrative expenses.
Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and it prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognizing, classification, interest and penalties, accounting in interim periods, disclosures and transitions.
The Company recognizes that virtually all tax positions in the PRC are not free of some degree of uncertainty due to tax law and policy changes by the PRC government.
Land Appreciation Tax (“LAT”)
In accordance with the relevant taxation laws in the PRC, the Company is subject to LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, which is calculated as the proceeds of sales of properties less deductible expenditures, including borrowings costs and all property development expenditures. LAT is prepaid at 1% to 2% of the pre-sales proceeds each year as required by the local tax authorities, and is settled generally after the construction of the real estate project is completed and majority of the units are sold. The Company provides LAT as expensed when the related revenue is recognized based on estimate of the full amount of applicable LAT for the real estate projects in accordance with the requirements set forth in the relevant PRC laws and regulations.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. The Company’s only components of comprehensive income during the three months ended March 31, 2014 and 2013 were net income and the foreign currency translation adjustment.
Earnings per Share
The Company reports earnings per share in accordance with ASC 260,
Earnings per Share
. ASC 260 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts, such as warrants and convertible preferred stock, to issue common stock were exercised and converted into common stock. Dilutive securities having an anti-dilutive effect on diluted earnings per share are excluded from the calculation. The company had losses exclude all dilutive securities for the three months ended March 31, 2014 and, 2014.
Advertising Expenses
Advertising costs are expensed as incurred, or the first time the advertising takes place, in accordance with ASC 720-35,
Advertising Costs
. For the three months ended March 31, 2014 and 2013, the Company recorded an advertising expense of $479,963 and $398,553, respectively.
Property Warranty
The Company provides customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two to five years, depending on different property components the warranty covers.
The Company constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Company may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Company withholds up to 5% of the contract total payment from contractors for periods of two to five years. These amounts are included in liabilities, and are only paid to the extent that there have been no warranty claims against the Company relating to the work performed or materials supplied by the contractors. As at March 31, 2014 and December 31, 2013, the Company retained $126,744 and $140,661 contract payment to contractors, and the Company didn’t experience any incidences where the withheld amounts were less than the amounts the Company had to pay for the defects of properties. The Company didn’t provide any warranty reserve as prospective expenditure amount on property warranty by the Company is insignificant. For the three months ended March 31, 2014 and 2013, the Company didn’t incur incidental costs in addition to the amount retained from contractors.
Impairment Losses
Completed real estate properties and land lots are reported in the balance sheet at the lower of their carrying amount or fair value less costs to sell. Land to be developed or under development is assessed for impairment when management believes that events or changes in circumstances indicate that its carrying amount may not be recoverable. Based on this assessment, a property that is considered impaired is written down to its fair value less costs to sell. Impairment losses are recognized through a charge to expense. No impairment of completed real estate properties or land lots was recognized for the three months ended March 31, 2014 and 2013.
Stock-Based Compensation
The Company adopted ASC 718
Stock Compensation
. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. The fair value estimate is based on the share price and other pertinent factors. The Company estimates forfeitures at the time of grant and to revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company used a mix of historical data and future assumptions to estimate pre-vesting forfeitures and to record stock-based compensation expense only for those awards that are expected to vest.
Recently Issued Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued amendments under ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (Topic 220). The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.
In April 2013, The FASB issued Accounting Standards Update (ASU) No. 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. The guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2014, and interim periods and annual periods thereafter. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position and results of operations.
In July 2013, The FASB issued Accounting Standards Update (ASU) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists at the reporting date. The amendments in this Update do not require new recurring disclosures. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.
The company does not believe other recently issued but not yet effective accounting standards from ASU 2014-01 to ASU 2014-08, if currently adopted, would have a material effect of the consolidated financial position, result of operation and cash flows.
Results of Operations
Comparison of Three Months Ended March 31, 2014 and 2013
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
% of
Revenue
|
|
|
|
|
|
% of
Revenue
|
|
Revenue from real estate sales, net
|
|
$
|
7,412,177
|
|
|
|
100
|
%
|
|
$
|
14,045,845
|
|
|
|
100
|
%
|
Cost of real estate sales
|
|
|
5,765,986
|
|
|
|
77.8
|
%
|
|
|
12,469,687
|
|
|
|
88.8
|
%
|
Gross profit
|
|
|
1,646,191
|
|
|
|
22.2
|
%
|
|
|
1,576,158
|
|
|
|
11.2
|
%
|
Selling expenses
|
|
|
779,828
|
|
|
|
10.5
|
%
|
|
|
917,458
|
|
|
|
6.5
|
%
|
Operating and administrative expenses
|
|
|
2,725,503
|
|
|
|
36.8
|
%
|
|
|
2,639,001
|
|
|
|
18.8
|
%
|
Loss from operations
|
|
|
(1,859,140
|
)
|
|
|
-25.1
|
%
|
|
|
(1,980,301
|
)
|
|
|
-14.1
|
%
|
Investment income
|
|
|
506,548
|
|
|
|
6.8
|
%
|
|
|
114,544
|
|
|
|
0.8
|
%
|
Interest expense
|
|
|
(1,331,118
|
)
|
|
|
-18.0
|
%
|
|
|
(1,756,478
|
)
|
|
|
-12.5
|
%
|
Total other expenses
|
|
|
(824,570
|
)
|
|
|
-11.1
|
%
|
|
|
(1,641,934
|
)
|
|
|
-11.7
|
%
|
Loss before income taxes expense
|
|
|
(2,683,710
|
)
|
|
|
-36.2
|
%
|
|
|
(3,622,235
|
)
|
|
|
-25.8
|
%
|
Income taxes benefit
|
|
|
(545,560
|
)
|
|
|
-7.4
|
%
|
|
|
(159,124
|
)
|
|
|
-1.1
|
%
|
Net loss
|
|
|
(2,138,150
|
)
|
|
|
-28.8
|
%
|
|
|
(3,463,111
|
)
|
|
|
-24.7
|
%
|
Our net loss for the three months ended March 31, 2014 was $2.1 million, a decrease of $1.4 million, from net loss of $3.5 million for the three months ended March 31, 2013. Net Loss decreased because of the following reasons: 1) in the first quarter of year 2014, Kirin Bay Phase I, Phase II and Phase III, No.79 Courtyard Phase I, Phase II and Phase III became the main revenue resource and contributed most of the increased gross profit; 2) for the three months ended March 31, 2014, the interest decreased substantially due to the interest income of $1.2 million in the first quarter of 2014; 3) in the first quarter of year 2014, the company received more investment income from Xingtai Rural commercial bank.
In line with the construction and pre-sale of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III) and preparation works for prospective projects, our overall operating expenses in staff salaries increased by $0.1 million, professional fee increased by $0.6 million and advertising expenses increased by $0.1 million, meanwhile administration decreased by $0.9 million for the three months ended March 31, 2014 as compared to the same period of 2013, the administration expense decreased because the Company recorded tax expense for prior years in the first quarter of 2013. Also, our interest expenses decreased by $0.4 million mainly due to a decreased average outstanding bank loans for the three months ended March 31, 2014 compared to those for the same period of 2013.
A project’s revenue and cost estimates are of inherent nature of uncertainty throughout its multiple-year development period. Factors that potentially affect a project’s total revenue and cost estimates (including a salable unit’s allocated cost), include, but are not limited to: (1) changes in government’s land-use planning, building density, plot ratio and other quotas; which lead to changes of total gross floor area available for sale and per-unit cost estimate; (2) the Company’s voluntary modification of design to enhance attractiveness and competiveness of an on-going project; (3) fluctuation of commodity prices and government-regulated labor cost rates; (4) contractors’ request to renegotiate consideration of fixed-price agreements, for which the Company’s preference of complete the discussion early to avoid unfavorable impact on construction progress; (5) unforeseeable geological and engineering difficulties causing modifications of a project’s construction plan; (6) government agencies’ compliance inspections in the late stage of the construction, which may lead to modification of design; (7) major prospective property buyers’ request to alter specifications of the property to be delivered; and (8) contractors’ claims throughout the construction period.
The Company enters into non-cancellable, fixed-price pre-sale contracts with homebuyers. Under certain circumstances, for example, changes in floor size or floor plan of a property due to legal compliance requirements, or change of deliverable standards upon request of major customers, we may agree to revise the pre-sale contract price to match conditions of the properties to be delivered to customers. Furthermore, the Company is subject to a penalty payable to homebuyers in the event the property is delivered later than the date specified in the pre-sale contracts, and usually such penalty usually constitutes only an insignificant amount compared to the contract value. These adjustments to contract price are recorded as reduction of revenue in the current period on a cumulative catch-up basis.
With regard to a project’s cost estimate, the Company’s in-house cost estimating staffs, work in collaboration with a committee comprising the Company’s engineers, project managers, financial professionals, and senior management staff, prepare at least two versions of cost estimate. The first version is Preliminary Cost Estimate, prepared in schematic design stage, which is before commencement of excavation and recognition of revenue. Preliminary Cost Estimate utilizes top-down approach. It projects major cost components at higher level using a project’s planned parameters (e.g., building density, by-category gross floor area) and standard per-unit cost from past experience (e.g., concrete cost, measured at US$ per square meter). Preliminary Cost Estimate is intrinsically less accurate; it heavily relies on the Company’s historical information accumulated in the development of similar types of construction in similar municipal region. The second version is Detailed Cost Estimate, prepared after receiving construction documents from the architect. Ideally Detailed Cost Estimate can be available before commencement of excavation and recognition of revenue; however, in order to suit the pre-sale progress and to maximize flexibility, construction documents are provided in several batches as the construction processes. It is likely that a project’s Detailed Cost Estimate is finalized only in late stage of the construction. Detailed Cost Estimate utilizes bottom-up approach. Based on construction documents and assisted by the Company’s computerized Building Information Modeling system, Detailed Cost Estimate is able to sum up cost at element level of a real estate property, taking into consideration of quantitative consumption and on-going rate of materials, labor, machinery and overheads. For the purpose of preparing the Company’s consolidated financial statements, a project’s cost estimate is reviewed by in-house cost estimators at each year-end and adjusted for material developments in the interval. Changes in estimates of a project’s revenue and cost of sales are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a project’s percentage of completion. When a project’s total cost estimate to be incurred exceeds total estimated revenue to be earned, a provision for the entire loss on the project is recorded in the period the loss is determined. In addition to our existing monthly detailed cost estimated upon receiving construction data from the architects, we have hired additional competent professionals to ensure early identification of variances from prior estimated project revenue and cost, to reduce the likelihood of significant changes to the estimates.
Revenues and Gross Profit
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
% of
Revenue
|
|
|
|
|
|
% of
Revenue
|
|
Revenue from real estate, net
|
|
$
|
7,412,177
|
|
|
|
100
|
%
|
|
$
|
14,045,845
|
|
|
|
100
|
%
|
-Kirin County
|
|
|
240,729
|
|
|
|
3.2
|
%
|
|
|
715,754
|
|
|
|
5.1
|
%
|
-No.79 Courtyard (Phase I)
|
|
|
103,485
|
|
|
|
1.4
|
%
|
|
|
9,657,973
|
|
|
|
68.8
|
%
|
-No.79 Courtyard (Phase II)
|
|
|
43,599
|
|
|
|
0.6
|
%
|
|
|
-
|
|
|
|
-
|
|
-No.79 Courtyard (Phase III)
|
|
|
818,942
|
|
|
|
11.0
|
%
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase I)
|
|
|
1,629,804
|
|
|
|
22.0
|
%
|
|
|
3,672,118
|
|
|
|
26.1
|
%
|
-Kirin Bay (Phase II)
|
|
|
1,855,196
|
|
|
|
25.0
|
%
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase III)
|
|
|
2,605,458
|
|
|
|
35.2
|
%
|
|
|
-
|
|
|
|
-
|
|
-Property Service
|
|
|
114,964
|
|
|
|
1.6
|
%
|
|
|
-
|
|
|
|
-
|
|
Cost of real estate sales
|
|
|
5,765,986
|
|
|
|
77.8
|
%
|
|
|
12,469,687
|
|
|
|
88.8
|
%
|
-Kirin County
|
|
|
577,537
|
|
|
|
7.8
|
%
|
|
|
764,310
|
|
|
|
5.4
|
%
|
-No.79 Courtyard (Phase I)
|
|
|
88,259
|
|
|
|
1.2
|
%
|
|
|
8,107,175
|
|
|
|
57.7
|
%
|
-No.79 Courtyard (Phase II)
|
|
|
22,620
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
-No.79 Courtyard (Phase III)
|
|
|
637,825
|
|
|
|
8.6
|
%
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase I)
|
|
|
539,206
|
|
|
|
7.3
|
%
|
|
|
3,598,202
|
|
|
|
25.6
|
%
|
-Kirin Bay (Phase II)
|
|
|
1,714,745
|
|
|
|
23.1
|
%
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase III)
|
|
|
2,061,762
|
|
|
|
27.8
|
%
|
|
|
-
|
|
|
|
-
|
|
-Property Service
|
|
|
124,032
|
|
|
|
1.7
|
%
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
1,646,191
|
|
|
|
22.2
|
%
|
|
|
1,576,158
|
|
|
|
11.2
|
%
|
-Kirin County
|
|
|
(336,808
|
)
|
|
|
-4.5
|
%
|
|
|
(48,556
|
)
|
|
|
-0.3
|
%
|
-No.79 Courtyard (Phase I)
|
|
|
15,226
|
|
|
|
0.2
|
%
|
|
|
1,550,798
|
|
|
|
11.0
|
%
|
-No.79 Courtyard (Phase II)
|
|
|
20,979
|
|
|
|
0.3
|
%
|
|
|
-
|
|
|
|
-
|
|
-No.79 Courtyard (Phase III)
|
|
|
181,117
|
|
|
|
2.4
|
%
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase I)
|
|
|
1,090,598
|
|
|
|
14.7
|
%
|
|
|
73,916
|
|
|
|
0.5
|
%
|
-Kirin Bay (Phase II)
|
|
|
140,451
|
|
|
|
1.9
|
%
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase III)
|
|
|
543,696
|
|
|
|
7.3
|
%
|
|
|
-
|
|
|
|
-
|
|
-Property Service
|
|
|
(9,068)
|
|
|
|
-0.1
|
%
|
|
|
-
|
|
|
|
--
|
|
Profit margin
|
|
|
22.2
|
%
|
|
|
|
|
|
|
11.2
|
%
|
|
|
-
|
|
-Kirin County
|
|
|
-139.9
|
%
|
|
|
|
|
|
|
-6.8
|
%
|
|
|
-
|
|
-No.79 Courtyard (Phase I)
|
|
|
14.7
|
%
|
|
|
|
|
|
|
16.1
|
%
|
|
|
-
|
|
-No.79 Courtyard (Phase II)
|
|
|
48.1
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-No.79 Courtyard (Phase III)
|
|
|
22.1
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase I)
|
|
|
66.9
|
%
|
|
|
-
|
|
|
|
2.0
|
%
|
|
|
-
|
|
-Kirin Bay (Phase II)
|
|
|
7.6
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-Kirin Bay (Phase III)
|
|
|
20.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-Property Service
|
|
|
-7.9
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Revenue from Real Estate, net.
Real estate sales represent revenue from the pre-sale of properties under development. For the three months ended March 31, 2014 and 2013, revenue was derived from the pre-sale of No.79 Courtyard (Phase I, Phase II, Phase III), Kirin Bay (Phase I, Phase II Phase III) and Kirin County (including adjacent shopping arcade) and property service. Under the percentage-of-completion method, revenue is the percentage of completed construction at a point in time is multiplied by total value of contracts signed up to that same point.
Our revenue from the pre-sale of real estate properties for the three months ended March 31, 2014 was $7.4 million, a decrease of $6.6 million, or approximately 47.2%, compared to $14.0 million for the same period of 2013. The revenue decreased because of the following reason: As announced by Housing and Construction Department of Hebei Province in September 2013, 15 Rules of Construction Dust Control Regulation (‘Construction Dust Control Regulation’) is applied for construction industry since October 1, 2013 in Hebei Province of People’s Republic of China. According to the Construction Dust Control Regulation, all construction sites in urban area must be closed when the weather condition is not favorable as a result of the construction dust, which mostly happens in winter. No. 79 Courtyard is located in urban area of Xingtai City, Hebei province, besides the impact of Chinese New Year holidays in the first quarter of 2014, as a result of the Construction Dust Control Regulation, No. 79 Courtyard was not permitted by local government to return to work until March 25, 2014, thus no progress of the POC for No. 79 Courtyard (Phase I, Phase II, Phase III) in the first quarter of 2014. The revenue of No.79 Courtyard decreased by $8.7 million in the three months ended March 31, 2014 as compared with the same period of 2013.
Revenue from the pre-sale of No.79 Courtyard (Phase I), No.79 Courtyard (Phase II), No.79 Courtyard (Phase III), Kirin Bay (Phase I), Kirin Bay (Phase II) and Kirin Bay (Phase III) was $103,485, $43,599, $818,942, $1,629,804, $1,855,196 and $2,605,458 respectively, representing 1.4%, 0.6%, 11.0%, 22.0%, 25.0% and 35.2% of total revenue earned in the three months ended March 31, 2014. For the three months ended March31, 2014, Hebei Zhongding Property Service Co., Ltd. began to provide property service and recognized revenue of $114,964 million.
The following tables set forth the percentage-of-completion (POC) by project for the period ended March 31, 2014 and 2013 and year ended December 31, 2013 and 2012:
|
|
As at
March 31,
2014
|
|
|
As at
December 31,
2013
|
|
|
As at
March 31,
2013
|
|
|
As at
December 31,
2012
|
|
No.79 Courtyard Phase I
|
|
|
95.3
|
%
|
|
|
95.3
|
%
|
|
|
68.5
|
%
|
|
|
65.5
|
%
|
No.79 Courtyard Phase II
|
|
|
59.1
|
%
|
|
|
59.1
|
%
|
|
|
-
|
|
|
|
-
|
|
No.79 Courtyard Phase III
|
|
|
53.6
|
%
|
|
|
53.6
|
%
|
|
|
-
|
|
|
|
-
|
|
Kirin Bay Phase I
|
|
|
85.1
|
%
|
|
|
85.0
|
%
|
|
|
61.1
|
%
|
|
|
56.1
|
%
|
Kirin Bay Phase II
|
|
|
63.1
|
%
|
|
|
61.0
|
%
|
|
|
-
|
|
|
|
-
|
|
Kirin Bay Phase III
|
|
|
38.3
|
%
|
|
|
35.9
|
%
|
|
|
-
|
|
|
|
-
|
|
Kirin County
|
|
|
98.3
|
%
|
|
|
98.1
|
%
|
|
|
96.9
|
%
|
|
|
96.1
|
%
|
Kirin Bay is a three-phase, master-planned community built on a land of approximately 660,000 square meters. Positioned as a mid-market residential development, Kirin Bay also features kindergarten, a primary school, hotel, office buildings and apartments. As of this Report, we have obtained necessary government approvals. For Kirin Bay (Phase I), we acquired Land Use Rights Certificates (issued on July 7, 2011), Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on August 10, 2011), Work Commencement Permit (issued on September 29, 2011) and Pre-Sales Permit (issued on September 30, 2011; for Kirin Bay (Phase II), we acquired Construction Land Planning Permit (issued on June 9, 2011), Construction Work Planning Permit (issued on July 31, 2012), Work Commencement Permit (issued on November 22, 2012) and Pre-Sales Permit (issued on March 26, 2013); and for Kirin Bay (Phase III), we obtained Construction Land Planning permit (issued On June 9, 2011), Construction Work Planning Permit (issued on January 15, 2013), Work Commencement Permit (issued on March 26, 2013) and Pre-sales Permit (issued on September 18, 2013).
No. 79 Courtyard is positioned as a high-end residential development with some mixed commercial use, which covers a land of over 290,000 square meters and a total building area of approximately 520,000 square meters. As of this Report, we have obtained necessary government approvals. For No.79 Courtyard (Phase I), we acquired Land Use Rights Certificate (issued on November 9, 2010), Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on September 1, 2011), Work Commencement Permit (issued on November 2, 2011) and Pre-Sales Permit (issued on November 2, 2011); for No.79 Courtyard (Phase II), we acquired Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on July 20, 2012), Work Commencement Permit (issued on September 1, 2012) and Pre-Sales Permit (issued on September 27, 2012); and for No.79 Courtyard (Phase III), we obtained Construction Land Planning Permit (issued on January 14, 2011), Construction Work Planning Permit (issued on January 16, 2013), Work Commencement Permit (issued on April 3, 2013) and Pre-sales Permit (August 12, 2013).
We bought the land use right of No. 79 Courtyard in 2007 and incurred land use right acquisition cost from year 2008 to 2011. We also started the land cleanup preparation work such as the demolishment and relocation in 2010 and early 2011, which resulted relevant cost as well. We also incurred cost related to the planning of the project as well as government levied tax and fees prior to the fourth quarter of 2011.
We have obtained necessary government approvals, including Land Use Rights Certificates, Construction Land Planning Permits, Construction Work Planning Permits, Work Commencement Permits and Pre-Sales Permits, for our No. 79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III). We also commenced to construct Kirin County’s shopping arcade from year 2011, which is supposed to complement Kirin County project, and provide convenience to the residents of Kirin County. However, due to the regional planning by the local authority, we have not obtain the Construction Land Planning Permits in a timely manner so far, and therefore, the construction shopping arcade part of Kirin County, is suspended temporarily from January 2012. We have communicated with the competent authority and received a notice called “Xingtai City Administrative Notice of Punishment” from the competent authority. According to the Notice, the government will issue the necessary approvals and permits for the shopping arcade in the near future, and we expect to receive the related permits in late 2014. Our current design of the shopping arcade, including but not limited to, salable gross floor area, is not disputed by local government agencies.
The following table summarizes the key pre-sale information of our projects (in thousands dollars):
|
|
Cumulative
contract
value of
pre-sale
as of
March 31,
2014
|
|
|
Cumulative
Customer
deposits
collected
as of
March 31,
2014
|
|
|
Contract
value of
pre-sale for
the three
months ended
March 31,
2014
|
|
|
Customer
deposits
collected for
the three
months ended
March 31,
2014
|
|
No.79 Courtyard Phase I
|
|
$
|
127,689
|
|
|
|
129,783
|
|
|
|
135
|
|
|
|
1,567
|
|
No.79 Courtyard Phase II
|
|
|
37,338
|
|
|
|
36,714
|
|
|
|
106
|
|
|
|
2,203
|
|
No.79 Courtyard Phase III
|
|
|
42,205
|
|
|
|
38,210
|
|
|
|
1,835
|
|
|
|
8,189
|
|
Kirin Bay Phase I
|
|
|
89,898
|
|
|
|
91,933
|
|
|
|
1,805
|
|
|
|
2,177
|
|
Kirin Bay Phase II
|
|
|
61,549
|
|
|
|
57,849
|
|
|
|
1,990
|
|
|
|
4,545
|
|
Kirin Bay Phase III
|
|
|
45,724
|
|
|
|
47,878
|
|
|
|
4,737
|
|
|
|
11,722
|
|
Kirin County
|
|
|
107,967
|
|
|
|
116,191
|
|
|
|
218
|
|
|
|
479
|
|
Others phases of Kirin Bay and No. 79 Courtyard
|
|
$
|
-
|
|
|
|
7,333
|
|
|
|
-
|
|
|
|
937
|
|
Cost of Real Estate Sales.
Cost of real estate sales consist of land use rights costs, construction and installation costs. Our costs of real estate sales for the three months ended March 31, 2014 were $5.8 million, a decrease of $6.7 million, or approximately 53.8%, compared to $12.5 million for the same period of 2013. Our total cost of real estate sales decreased in relation to the construction of the project, as a result of the Construction Dust Control Regulation, No. 79 Courtyard was not permitted by local government to return to work until March 25, 2014, thus no progress of the POC for No. 79 Courtyard (Phase I, Phase II, Phase III) in the first quarter of 2014.
Gross Profit
Gross profit was $1.6 million for the three months ended March 31, 2014, same as compared to gross profit of $1.6 million for the same period of last year. Gross margin ratio was 22.2% for the three months ended March 31, 2014, an increase of 10% as compared to the gross margin ratio of 11.2% for the same period of 2013. The increase of gross margin ratio was contributed by construction progress and sales of Kirin Bay (Phase I, Phase II and Phase III) for the three months ended March 31, 2014. Kirin Bay has higher average gross margin ratio than the projects in the first quarter of 2013.
The following tables set forth the aggregate Gross Floor Area (GFA) and the percentage-of-completion (POC) and Contract sold by project for the three months ended March 31, 2014 and 2013:
|
|
Total GFA
|
|
|
POC cumulative
accomplished
|
|
|
Contract value
of units sold
for the
three months
ended
March 31,
|
|
|
Revenue
recognized
for the
three months
ended
March 31,
|
|
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
No.79 Courtyard (Phase I)
|
|
|
130,033
|
|
|
|
95.3
|
%
|
|
|
68.5
|
%
|
|
$
|
135,264
|
|
|
$
|
10,517,938
|
|
|
$
|
103,485
|
|
|
$
|
9,657,973
|
|
No.79 Courtyard (Phase II)
|
|
|
45,122
|
|
|
|
59.1
|
%
|
|
|
-
|
|
|
|
105,558
|
|
|
|
-
|
|
|
|
43,599
|
|
|
|
-
|
|
No.79 Courtyard (Phase III)
|
|
|
47,960
|
|
|
|
53.6
|
%
|
|
|
-
|
|
|
|
1,835,192
|
|
|
|
-
|
|
|
|
818,942
|
|
|
|
-
|
|
Kirin Bay (Phase I)
|
|
|
162,378
|
|
|
|
85.1
|
%
|
|
|
61.0
|
%
|
|
|
1,804,987
|
|
|
|
1,796,222
|
|
|
|
1,629,804
|
|
|
|
3,672,118
|
|
Kirin Bay (Phase II)
|
|
|
92,043
|
|
|
|
63.1
|
%
|
|
|
-
|
|
|
|
1,990,055
|
|
|
|
-
|
|
|
|
1,855,196
|
|
|
|
-
|
|
Kirin Bay (Phase III)
|
|
|
131,384
|
|
|
|
38.3
|
%
|
|
|
-
|
|
|
|
4,736,710
|
|
|
|
-
|
|
|
|
2,605,458
|
|
|
|
-
|
|
Kirin County
|
|
|
182,964
|
|
|
|
98.3
|
%
|
|
|
96.9
|
%
|
|
|
217,785
|
|
|
|
111,216
|
|
|
|
355,693
|
|
|
$
|
715,754
|
|
Total
|
|
|
791,884
|
|
|
|
|
|
|
|
|
|
|
$
|
10,825,551
|
|
|
$
|
12,425,376
|
|
|
$
|
7,412,177
|
|
|
$
|
14,045,845
|
|
The following tables set forth the consolidated square meters sold and average selling price per square meter by each project for the three months ended March 31, 2014 and 201
3:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
Contract
Sales(1)
|
|
|
Square
Meters
Sold(2)
|
|
|
Average
Selling
Price(3)
|
|
|
Contract
Sales(1)
|
|
|
Square
Meters
Sold(2)
|
|
|
Average
Selling
Price(3)
|
|
No.79 Courtyard Phase I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-residential
|
|
$
|
(15,216
|
)
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
9,017,660
|
|
|
|
9,110
|
|
|
$
|
990
|
|
-commercial
|
|
|
18,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
337,502
|
|
|
|
77
|
|
|
|
4,396
|
|
-garage
|
|
|
132,356
|
|
|
|
318
|
|
|
|
416
|
|
|
|
1,162,776
|
|
|
|
1,872
|
|
|
|
621
|
|
No.79 Courtyard Phase II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-One elevator and four suites
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-Parking lots
|
|
|
105,558
|
|
|
|
72
|
|
|
|
1,466
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
No.79 Courtyard Phase III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-residential
|
|
|
1,478,744
|
|
|
|
1,218
|
|
|
|
1,215
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-commercial
|
|
|
144,809
|
|
|
|
34
|
|
|
|
4,207
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-garage
|
|
|
211,639
|
|
|
|
195
|
|
|
|
1,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Kirin Bay Phase I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-residential
|
|
|
344,016
|
|
|
|
362
|
|
|
|
949
|
|
|
|
1,410,966
|
|
|
|
1,870
|
|
|
|
755
|
|
-garage
|
|
|
1,460,971
|
|
|
|
2,548
|
|
|
|
573
|
|
|
|
385,256
|
|
|
|
1,088
|
|
|
|
354
|
|
Kirin Bay Phase II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-residential
|
|
|
1,879,244
|
|
|
|
1,323
|
|
|
|
1,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-garage
|
|
|
110,811
|
|
|
|
185
|
|
|
|
598
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Kirin Bay Phase III
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-residential
|
|
|
4,413,943
|
|
|
|
4,814
|
|
|
|
917
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
-garage
|
|
|
322,767
|
|
|
|
435
|
|
|
|
743
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Kirin County
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-residential
|
|
|
2,883
|
|
|
|
|
|
|
|
|
|
|
|
111,216
|
|
|
|
159
|
|
|
|
701
|
|
-commercial
|
|
|
100,089
|
|
|
|
116
|
|
|
|
863
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
-garage
|
|
|
114,813
|
|
|
|
484
|
|
|
|
237
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,825,551
|
|
|
|
12,104
|
|
|
$
|
894
|
|
|
$
|
12,425,376
|
|
|
|
14,176
|
|
|
$
|
877
|
|
(1)
|
This column reflects the aggregate amount of all contracts entered into as of the end of the applicable period.
|
(2)
|
This column reflects the total square meters sold during the applicable period.
|
(3)
|
This column reflects the average price per square meter for all properties sold during the applicable period.
|
Operating Expenses.
Operating expenses for the three months ended March 31, 2014 were $3.5 million, a decrease of $0.1 million, or 1.4%, from $3.6 million for the three months ended March 31, 2013. The decrease was because our overall operating expenses in staff salaries increased by $0.1 million, professional fee increased by $0.6 million and advertising expenses increased by $0.1 million, meanwhile administration expenses decreased by $0.9 million for the three months ended March 31, 2014 as compared to the same period of 2013, the administration expense decreased because the Company recorded tax expense for prior years in the first quarter of 2013.
We expect our selling and marketing expenses to increase in the near future in connection with pre-sale and construction of Kirin Bay and No.79 Courtyard’s new phases and development of new projects.
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
% of
Expenses
|
|
|
|
|
|
% of
Expenses
|
|
Operating expenses
|
|
$
|
3,505,331
|
|
|
|
100.0
|
%
|
|
$
|
3,556,459
|
|
|
|
100.0
|
%
|
Selling expenses
|
|
|
779,828
|
|
|
|
22.2
|
%
|
|
|
917,458
|
|
|
|
25.8
|
%
|
Advertising expense
|
|
|
479,963
|
|
|
|
13.7
|
%
|
|
|
400,710
|
|
|
|
11.3
|
%
|
Staff salaries
|
|
|
81,779
|
|
|
|
2.3
|
%
|
|
|
189,656
|
|
|
|
5.3
|
%
|
Office and Administrative expenses
|
|
|
218,086
|
|
|
|
6.2
|
%
|
|
|
327,092
|
|
|
|
9.2
|
%
|
General and administrative expenses
|
|
|
2,725,503
|
|
|
|
77.8
|
%
|
|
|
2,639,001
|
|
|
|
74.2
|
%
|
Staff salaries
|
|
|
970,914
|
|
|
|
27.7
|
%
|
|
|
713,905
|
|
|
|
20.1
|
%
|
Professional expenses
|
|
|
1,221,516
|
|
|
|
34.8
|
%
|
|
|
585,166
|
|
|
|
16.5
|
%
|
Office and Administrative expenses
|
|
|
533,073
|
|
|
|
15.2
|
%
|
|
|
1,339,930
|
|
|
|
37.7
|
%
|
●
|
Advertising Expenses.
Our advertising expenses increased from $0.4 million for the three months ended March 31, 2013 to $0.5 million for the same period of 2014. This reflects new advertising campaigns to promote the pre-sale of our No.79 Courtyard (Phase II and Phase III) and Kirin Bay (Phase II and Phase III), both of which are currently in their construction stage. The advertising expenses are expected to further increase as we advance to next phase of our No.79 Courtyard and Kirin Bay projects.
|
●
|
Staff Salaries.
For the three months ended March 31, 2014 and 2013 our selling and administrative staff expenses were $1.1 million and $0.9 million respectively. This increase is mostly related to more sales champion for our No.79 Courtyard and Kirin Bay projects. As we gradually increase the scope and size of our projects, there is an increasing demand for more administrative and sales staff necessary for meeting satisfactory operation standards. We also recruited several professional managers to help with project management and sales. These expenses are expected to increase in the near future as sales and construction of other phases of the No.79 Courtyard and Kirin Bay projects continue.
|
●
|
Office and Administrative Expenses.
Office and administrative expenses decreased from $1.7 million for the three months ended March 31, 2013 to $0.8 million for the three months ended March 31, 2014, that’s because the Company recorded tax expense for prior years in the first quarter of 2013.
|
Interest Expense.
Our interest expense was $1.3 million for the three months ended March 31, 2014, a decrease of $0.5 million, or 24.2%, from $1.8 million for the same period of 2013. The decrease was primarily due to the interest income of $1.2 million in the first quarter of 2014. We expect that there will be an increase of interest expense in the near future when we have additional projects in development.
Income Taxes.
Income taxes benefit for the three months ended March 31, 2014 totaled $0.5 million, an increase of $0.3 million or 242.9% from income taxes benefit of $0.2 million for the three months ended March 31, 2013. The changes in our income taxes were mainly due to decrease of land appreciation tax and income tax expense.
Net Loss.
Net loss for the three months ended March31, 2014 was $2.1 million compared to net loss of $3.5 million for the three months ended March 31, 2013, a decrease of $1.4 million or 38.3%. This decrease was principally a result of the increased gross profit contributed by the sales of No.79 Courtyard (Phase I, Phase II and Phase III) and Kirin Bay (Phase I, Phase II and Phase III) and the decreased selling, general and administrative expenses and decreased interest expenses relating to the repaying of a high number of loans.
Liquidity and Capital Resources
The following table sets forth a summary of our cash flows for the periods indicated:
|
|
Three Months Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Net cash generated from (used in)operating activities
|
|
$
|
(15,122,484
|
)
|
|
$
|
11,746,182
|
|
Net cash provided in investing activities
|
|
|
12,947,794
|
|
|
|
11,181,442
|
|
Cash flows used in financing activities
|
|
|
(1,143,819
|
)
|
|
|
(7,954,412
|
)
|
Effect of exchange rate changes on cash and cash equivalent
|
|
|
(142,629
|
)
|
|
|
136,029
|
|
Net increase(decrease) in cash and cash equivalents
|
|
|
(3,461,138
|
)
|
|
|
15,109,241
|
|
Cash and cash equivalents - beginning of period
|
|
|
23,407,551
|
|
|
|
24,098,688
|
|
Cash and cash equivalents - end of period
|
|
|
19,946,413
|
|
|
|
39,207,929
|
|
We had a balance of cash and cash equivalents of $19.9 million as of March 31, 2014 compared with a balance $39.2 million as of March 31, 2013. We have historically funded our working capital needs through advance payments from customers, bank borrowings, and capital from stockholders. Our working capital requirements are influenced by the state and level of our operations, and the timing of capital needed for projects.
Operating Activities
.
Net cash outflow from operating activities was $15.1 million for the three months ended March 31, 2014, compared to net cash provided from operating activities of $11.7 million for the three months ended March 31, 2013, a decrease of $26.8 million. The decrease in net cash flows from operating activities was primarily due to the following:
●
|
We received $ 25.2 million from customers as down payments and subsequent installments (combination of revenue in excess of billings and customer deposits) in the three months ended March 31, 2014, compared to $35.1 million received in the three months ended March 31, 2013, which led to a $9.9 million decrease in net cash inflow from operating activities;
|
●
|
We invested $23.7 million in real properties and land lots under development (combination of accounts payable) in the nine months ended March31, 2014. In the same period of 2013, we spent $11.9 million on our projects, part of which was payment of land lot cost for No.79 Courtyard and Kirin Bay. This accounted for $11.8 million increase in the net cash outflow from operating activities;
|
●
|
Changes in other receivable provided $11.2 million cash outflow for the three months ended March 31, 2014. In the same period of 2013, changes in other receivable contributed $8.6 million cash outflow, which led to a $2.6 million increase in net cash outflow from operating activities.
|
●
|
Changes in other payable provided $0.1 million cash outflow for the three months ended March 31, 2014. In the same period of 2013, changes in other payable contributed $5.4 million cash inflow, which led to a $5.5 million decrease in net cash inflow from operating activities.
|
●
|
Changes in income tax payable (combination of other taxes payable) provided $0.5 million cash outflow for the three months ended March 31, 2014. In the same period of 2013, changes in tax payable contributed $6.6 million cash inflow.
|
Investing Activities.
Net cash inflow provided by investing activities was $12.9 million for the three months ended March 31, 2014, compared to net cash inflow of $11.2 million provided from investing activities for the three months ended March 31, 2013, represented an increase of $1.7 million.
Financing Activities
.
Net cash outflow from financing activities was $1.1 million for the three months ended March 31, 2014, compared to $8.0 million cash outflows for the three months ended March 31, 2013, a decrease of cash outflows of $6.9 million. This was mainly due to repayment RMB50,000,000 to financial institution loan in March 2013, the Company repaid RMB17,000,000 loan to financial institution in the first quarter of 2014, meanwhile, the Company received RMB10,000,000 loan from financial institution in the first quarter of 2014.
Contractual Obligations
Long-term debt obligations, costs of land use rights and non-cancellable construction contract obligations for the three months ended of March 31, 2014
|
|
Payments due by period
|
|
|
|
|
|
|
less than
|
|
|
1-3
|
|
in thousands of US Dollars
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
Loans payable
|
|
$
|
87,600
|
|
|
$
|
52,722
|
|
|
$
|
34,878
|
|
Costs of land use rights
|
|
|
3,798
|
|
|
|
3,798
|
|
|
|
-
|
|
Non-cancellable construction contract obligations
|
|
|
83,792
|
|
|
|
83,311
|
|
|
|
481
|
|
Total
|
|
|
175,190
|
|
|
|
139,831
|
|
|
|
35,359
|
|
Customers’ down payments and installments provide a significant portion of our cash inflows. We may also acquire additional cash by raising funds through new borrowings, refinancing of existing borrowings, public or private sales of equity securities, or a combination of one or more of the above; however, there can be no absolute assurance that our internally generated cash flows and external financing will be sufficient to meet our contractual and financing obligations in a timely manner.
As of March 31, 2014, we entered into non-cancellable agreements with several suppliers for our on-going business of constructing residential and commercial properties. The total amount we committed to pay contractors as outlined in these non-cancellable construction agreements aggregates approximately $83.8 million.
Material Financial Obligations
Loans Payable
As of March 31, 2014 our total loan balance was $87.6 million.
●
|
In August 2012 one of the wholly-owned subsidiaries of our variable interest entity, Xingtai Zhongding Kirin Real Estate Development Co., Ltd., entered into a long-term loan contract totaling RMB 150,000,000 (approximately $24,333,000) with XingtaiChengjiao Rural Credit Cooperative Union Association. The loan provides terms ranging from maximums of 18 to 24 months and is designated for propagating the development of the Kirin Bay Project. The loan is collateralized with the Kirin Bay land use rights. As of March 31, 2014, these loans’ effective interest rate was 11.38% per annum.
|
●
|
On September 17, 2012, one of the wholly-owned subsidiaries of our variable interest entity, Hebei Zhongding Real Estate Development Co., Ltd. entered into a loan contract with Industrial and Commercial Bank of China, XingtaiYejin branch for a series of loans with a maximum principle amount of RMB180,000,000 (approximately $29,200,000). These loans were collateralized by partial of the Company’s No. 79 Courtyard land use rights and properties under development, due in several installments through January 31, 2014 to September 18, 2015, and borne an annual interest rate of 9.225%. The company repaid RMB 3,000,000 on December 27, 2013 and RMB 17,000,000 on January 25, 2014 to the financial institution. As of March 31, 2014, the balance of loan is RMB 160,000,000 (approximately $25,950,000)
|
●
|
In December 2013, one of the wholly-owned subsidiaries of our variable interest entity Xingtai Zhongding Kirin Real estate Development Co., Ltd. entered into a loan contract to totaling $4,866,653(RMB 30,000,000) with Kong Village Committee with 6 to 9 months term, with an interest rate of 14.4% per annum. This loan is not collateralized.
|
●
|
On April 24, 2013, one of our group companies, Xingtai Zhongding Kirin Real Estate Development Co., Ltd entered into a loan contract with Xingtai Rural Commercial Bank with amount of RMB 20,000,000 (approximately $3,244,436) through HebeiYouerma Business Service Co.,Ltd (a third party company). This loan was credit loan, and borne an annual effective interest rate of 8.55%. The principal amount of the loan is due on April 24, 2014. On April 21, 2014, Xingtai Zhongding Kirin Real Estate Development Co.,Ltd repaid RMB 20,000,000 loan to Xingtai Rural Commercial Bank.
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●
|
On May 15, 2013, HebeiZhongding Real Estate Development Co., our subsidiary, entered into a loan contract with Industrial and Commercial Bank of China, XingtaiYejin Branch for a series of loans with a maximum principle amount of RMB270,000,000 (approximately $43,799,883). These loans were partially collateralized by the Company’s No. 79 Courtyard land use, and borne an annual effective interest rate of 9.84%. As of March 31, 2014, the Company has drawn RMB 180,000,000 (approximately $29,200,000) from the bank. The term of the loan is for 36 months, which will start from the actual withdrawal date. RMB70,000,000 shall be repaid by January 30, 2014. RMB50,000,000 shall be repaid by March 30, 2015. RMB50,000,000 shall be repaid by January 30, 2016. RMB50,000,000 shall be repaid by May 30, 2016. The subsidiary agreed to pay RMB3,800,000 to the lender as a financing service charge under the loan.
|
Related Party Transactions and Balances
(1) Loan to a related party
In August 2013, Kirin entered into a loan agreement with HuaxiaHuifeng Ventures Capital Management (Beijing) Co., Ltd. (“HuaxiaHuifeng”), a related company ultimately controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin. According to the agreement, Kirin made a loan to HuaxiaHuifeng for $35,953,000. On October 15, 2013, the Company signed a supplement loan agreement in amount of $27,636,000 (RMB 170,000,000) which bears 18% interest rate and has a term of one year.
As of March 31, 2014, the balance of the loan to HuaxiaHuifeng was $33,021,956 (RMB 189,560,000 for original loan and RMB 14,000,548 for interest income).
(2) Government grant escrowed by Business Investment
In 2008, a VIE of the Company, XingtaiZhongding, was entitled to a government grant associated with its development of Kirin County project of RMB 160,000,000 ($22,981,000, translated at historical exchange rate). Cash representing the grant has been remitted to Business Investment, a trust equity owner of XingtaiZhongding in June 2008. Business Investment originally acquired the land use rights of Kirin County project, and contributed the land use rights to XingtaiZhongding as paid-in capital to develop the project. Based on the arrangement between Business Investment and XingtaiZhongding, which has been sanctioned by local government, the benefit of the government grant is to be transferred from Business Investment to XingtaiZhongding. Specifically, Business Investment acts as an escrow agent but also is nominally responsible for XingtaiZhongding’s progress. Earned portions of the government grant become available to XingtaiZhongding based on percentage of completion.
For the years ended December 31, 2012, 2011, 2010 and 2009, XingtaiZhongding was entitled to receive RMB2,800,000, RMB43,000,000, RMB63,000,000, and RMB51,200,000, respectively ($443,049, $6,642,455, $9,293,749, and $7,484,417, respectively, translated at respective years’ historical rates) earned government grant from Business Investment, representing total amount of the government grant. The Company has the right to determine how to utilize the earned government grant. As at March 31, 2014 and December 31, 2013, accumulated earned government grant of RMB160,000,000 and RMB160,000,000 ($25,955,486 and $26,169,447, translated at respective years’ historical rates) was used to repay working capital provided by JianfengGuo for the support of other real estate projects’ development. As at March 31, 2014, the Company had a remaining $3,030,770 earned government grant available for future drawdown after repaid working capital provided by JianfengGuo, which is included in “Receivable from a related party” in consolidated balance sheet.
(3) Working capital provided by JianfengGuo
JianfengGuo, the controlling stockholder of the Company, through various affiliate companies and individuals, provides working capital to the VIEs (hereafter, including subsidiaries of VIEs) of the Company. In addition to repaying borrowings directly, the Company’s VIEs may also provide working capital to affiliate companies and individuals as designated by JianfengGuo. Balances received or provided by the Company’s VIEs are unsecured, interest-free and did not have specific repayment dates.
At each balance sheet date, affiliate companies and individuals who have working capital transactions with the Company’s VIEs assigned their balances to JianfengGuo pursuant to the pre-existing arrangements, as recited by multi-party agreements entered into between JianfengGuo, related affiliate companies and individuals, and the Company’s VIEs. XingtaiZhongding also chooses to use its accumulated government grant receivable from Business Investment, to repay working capital provided by JianfengGuo. As at March 31, 2014 and December 31, 2013, the working capital provided by Jianfeng Guo was RMB141,317,120 and RMB134,029,025 ($22,924,716 and $21,921,659 translated at respective historical rates). Accordingly, the Company is entitled to present netted balance with JianfengGuo on its consolidated balance sheets.
Gross amount of working capital provided by and to affiliate companies and individuals designated by JianfengGuo as at March 31, 2014 and December 31, 2013 were as follows:
|
|
March 30,
|
|
|
December 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Gross of working capital received from affiliate companies and individuals designated by JianfengGuo
|
|
$
|
(44,959,109
|
)
|
|
$
|
(41,521,029
|
)
|
Gross of working capital provided to affiliate companies and individuals designated by JianfengGuo
|
|
|
22,034,393
|
|
|
|
19,599,370
|
|
Working capital provided by JianfengGuo in total
|
|
|
(22,924,716
|
)
|
|
|
(21,921,659
|
)
|
Gross earned government grant held by a related party
|
|
|
25,955,486
|
|
|
|
26,169,447
|
|
Receivable from a related party
|
|
$
|
3,030,770
|
|
|
$
|
4,247,788
|
|
(4) Short-term Loans to Related party
As of December 31, 2013, the ending balance of short-term loan to related party companies was $12,250,572 (RMB 74,900,000), these are all wired to five related companies on December 31, 2013 and paid back on January 2, 2014. All the five related companies are ultimately controlled by JianfengGuo, Chairman of the Kirin’s Board of Directors, and the controlling stockholder of Kirin.
On December 30, 2013, Hebei Zhongding entered into loan agreements with Beijing Cathay Kirin Investment Development Company, Beijing Cathay Kirin Assets Management Company and Begijing Kirin Zhitong Network Company, each loan agreement amounts to RMB 10,000,000. On December 30, 2013, Business Service entered into loan agreements with Beijing Cathay Kirin Hospitality Management Company, and Cathay Brother (Beijing) Investment Management Company, each loan agreement amounts to RMB 24,900,000 and RMB 20,000,000, respectively. The maturity date of the loan agreements is January 2, 2014. On January 2, 2014 the Company received RMB 74,900,000 short-term loans from related party companies.
(5) Prepayment to related party
Please see financial statements Note 7 – Prepayments
(6) Notes receivable from related party
Please see Note 5 – Notes receivable
Relocation Program of Kong Village
Local government did not have enough funds to pay for the relocation and new accommodations of Kong Village’s residents prior to the sale of the village’s land-use right. Consequently, the Company funded the local government by building new complexes and compensating and accommodating the villagers for and during the relocation. The government will repay our costs (a form of financing provided to government) when it sells the land use rights on which the previous villagers were removed. In exchange for such financing, the Company is assured the vacated land use right in public auction; (we will be refunded according to the sale price of the land so the bidding process is noncompetitive). We will construct 1,818 units for Kong Village, or about 280,000 square meters in housing. We will get repaid as the parcels of land use rights are sold. We will attend all the auction and bidding process and acquire the vacated land.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Recently Issued Accounting Pronouncements
FASB issued several ASUs during the period, which are not expected to have a material impact on the consolidated financial statements upon adoption.